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Promising Stocks Wall Street Ignores

Think small to get ahead.

The following information may shock you: Wall Street firms are covering far fewer companies today than they were just a few years ago. According to SmartMoney, "In 2000 ... more than 7,600 companies were covered by at least three analysts. Today, that number is below 6,000."

Which companies get ignored by Wall Street? The smallest ones. In fact, more than 90% of the thousands of publicly traded companies that have no analyst coverage are small caps.

That means opportunity for all of us.

Opportunity? What opportunity?We know that small companies offer the market's best returns. So the dearth of analyst coverage means that small-cap stocks are more likely to be priced inefficiently. Ergo, we can -- under optimal circumstances -- buy the market's most promising stocks at the market's best prices.

That's a recipe for success, and it's one of the reasons we focus exclusively on researching small- and micro-cap stocks at Motley Fool Hidden Gems. Just take a look at some of the stocks we've highlighted recently, and the number of pros who work their beats.

Company

Market Cap (in Millions)

Analysts Covering

G-III Apparel (NASDAQ:GIII)

$235

4

Sturm, Ruger (NYSE:RGR)

$190

1

Fuel Tech (NASDAQ:FTEK)

$381

12

Data from Thomson.

Meet the efficient market
Compare that amount of analyst coverage with three of the biggest companies on the market.

Company

Market Cap (in millions)

Analysts Covering

Bank of America (NYSE:BAC)

$190,400

24

ExxonMobil (NYSE:XOM)

$505,990

23

ConocoPhillips (NYSE:COP)

$135,270

23

Data from Thomson.

It's not even close.

There are plenty of reasons why more analysts cover the bigger firms: There's more news, more interest, and more of an opportunity for the firm to make a market in the security. However, those reasons don't include any chance that mega caps offer more gains for the individual investor.

In fact, it's exactly the opposite!

The Foolish bottom lineYou can make money investing in a basket of carefully chosen, small, underfollowed companies. That's what we do at Hidden Gems, and our picks are beating the large-cap-laden S&P 500 by 26 percentage points. You can learn more about our specific strategies and recommendations for free for 30 days. Click here for details.

This article was originally published on June 17, 2006, as "Stocks With Promise That Wall Street Ignores." It has been updated.

Neither Tim Hanson nor Brian Richards owns shares of any company mentioned in this article. Bank of America is an Income Investor recommendation. No Fool is too cool for disclosure.